Forward Purchase Agreement Advantages and Disadvantages

A forward purchase agreement (FPA) is a type of agreement where a buyer and a seller agree on a transaction at a predetermined price at a future date. The agreement is commonly used in the real estate industry, where a developer may sell a property to a buyer before it is constructed. In this article, we will explore some of the advantages and disadvantages of forward purchase agreements.

Advantages

1. Price certainty: One of the key advantages of forward purchase agreements is that they provide price certainty for both the buyer and the seller. The buyer knows the exact price they will pay for the asset, and the seller knows the exact price they will receive.

2. Reduced risk: Forward purchase agreements also help to reduce risk for both parties. The buyer is protected from price fluctuations in the market, and the seller is protected from the risks associated with developing the asset.

3. Eliminates the need for marketing: For developers, an FPA eliminates the need for marketing the property. They can secure a buyer before the property is even complete, which can save them time, money, and effort.

4. Flexible payment terms: With an FPA, buyers may be able to negotiate more flexible payment terms. For example, they may be able to make a deposit upfront and pay the balance in installments over time.

Disadvantages

1. Limited flexibility: One of the main disadvantages of forward purchase agreements is that they limit flexibility. Once the buyer and seller agree to the terms of the FPA, they are bound by the agreement and cannot make changes without the other party`s consent.

2. Opportunity cost: Another disadvantage of FPA is opportunity cost. When a buyer agrees to purchase an asset at a predetermined price, they miss out on the opportunity to capitalize on any price drops in the market.

3. Potential for non-delivery: There is a risk of non-delivery with FPA, particularly in cases where the asset is still under development. If the seller fails to complete the asset by the predetermined date, it can cause significant inconvenience and financial loss to the buyer.

4. Contractual obligations: FPA can also be a disadvantage due to the contractual obligations they impose on the parties involved. If one of the parties breaches the agreement, there may be legal consequences that can be costly, time-consuming, and lead to reputational damage.

Conclusion

In conclusion, forward purchase agreements have both advantages and disadvantages. They provide price certainty and reduce risk for both buyers and sellers. However, they limit flexibility and can have a potential opportunity cost. Therefore, before entering into an FPA, it is important to weigh these advantages and disadvantages and ensure that the agreement aligns with your goals and objectives.